Search Suggestion:

# Step 5: Calculate the debt deductions disallowed

How to calculate the debt deductions disallowed if you're an outward investing entity (ADI).

Last updated 23 July 2024

The ADI's minimum capital amount is the least of the:

• safe harbour capital amount from step 2
• worldwide capital amount from step 3
• arm's length capital amount from step 4.

You do not necessarily have to calculate all 3 amounts. For example, you can use the safe harbour capital amount as the minimum capital amount if you do not want to calculate either a worldwide capital amount or an arm's length capital amount.

If the ADI's adjusted average equity capital is less than its minimum capital amount, a proportion of its debt deductions cannot be deducted. Table 53: outward investing entity (ADI)'s step 5 and Worksheet 45: outward investing entity (ADI)'s step 5 work out the proportion disallowed.

Table 33: Outward investing entity (ADI)'s step 5

Steps

Step 5.1: Calculate the amount by which the ADI's adjusted average equity capital is less than its minimum capital amount (the capital shortfall).

Insert this amount at L on Worksheet 27: Outward investing entity (ADI)'s step 5.

The proportion of debt deductions disallowed depends on the amount by which the ADI's adjusted average equity capital from step 1 is less than its minimum capital amount.

Step 5.2: Calculate the ADI's average debt.

Insert this amount at M on Worksheet 27: Outward investing entity (ADI)'s step 5.

The average value for the income year of the ADI's debt capital that gives rise to debt deductions in that year or any other income year. However, it does not include debt capital attributable to any of the ADI's overseas permanent establishments.

Step 5.3: Divide the amount at L by the amount at M.

Insert the result at N on Worksheet 27: Outward investing entity (ADI)'s step 5.

This step works out what proportion to apply to the ADI's debt deductions to calculate the amount disallowed.

Step 5.4: Calculate the ADI's debt deductions for the income year.

Insert this amount at P on Worksheet 27: Outward investing entity (ADI)'s step 5.

The calculation is applied to all the ADI's debt deductions for the year. Do not include any debt deductions attributable to any of the ADI's overseas permanent establishments.

Step 5.5: Multiply the amount(s) at N by the amount at P. This is the amount of debt deductions disallowed.

This calculates the amount of debt deduction disallowed. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately.

Worksheet 27: Outward investing entity (ADI)'s step 5

Steps

\$

Step 5.1: Capital shortfall (minimum capital amount minus adjusted average equity capital)

(L) _____________

Step 5.2: Average debt

(M) _____________

Step 5.3: L ÷ M

(N) _____________

Step 5.4: Debt deductions for the income year

(P) _____________

Step 5.5: N × P

This is the total debt deductions disallowed

= _______________

This is the amount of debt deductions the outward investing entity (ADI) is not allowed to deduct under the thin capitalisation rules.